Legislative CAT fight is looming
3rd April 2017 · 0 Comments
By Christopher Tidmore
Contributing Writer
In his “2017 Budget Stabili-zation Plan,” Louisiana’s Governor split the difference on his tax reform proposal. In a press conference less than two weeks before the 60-day Legislative Session convenes, John Bel Edwards proposed enacting a gross receipts tax on all Louisiana businesses—as well as keeping the existing corporate income tax in place, though at lower rates (thanks to eliminating federal deductions). He conducts this fiscal balancing act so that the total state retail sales tax can fall from the current 10 percent to nine percent.
Edwards announced last Wednesday that he wishes the legislature to enact a “Commercial Activity Tax” (CAT) for corporations and limited liability entities. This close cousin of Donald Trump’s Federal corporate tax reform would put a .35 percent tax on the gross receipts of most Louisiana businesses including retail, wholesale, service, and manufacturing regardless of the type of business organization. Call it a sales tax at the source.
What Edwards has opted not do is get rid of Louisiana’s corporate income tax. The Governor would pair a 10-year phase out the corporate franchise tax with passing CAT, but he would continue charging a state corporate income tax. Edwards does propose stripping away current allowed deductions, which would allow corporate income tax rates to fall to one, three and five percent
The two taxes together would produce enough revenue to completely eliminate the one cent in sales tax passed by the legislature last year, nearly $800 million, as well as fund budgetary priorities. However, levying this CAT new tax on business—which includes entities previously untaxed at the corporation level including partnerships, LLCs, S corporations, and limited partnerships, as well as effectively boosting taxes on C corporations and other types of associations (by keeping the corporate income tax) — is politically problematic to say the least.
“For far too long, the people of Louisiana have footed the bill for costly tax credits and exemptions while too many very profitable businesses don’t pay a penny of income taxes,” Edwards said.
When the idea of the CAT was flooded several weeks ago, aides to the Governor suggested “leveling the playing field.” The state could produce more revenue by taxing gross receipts of entities free from the corporate income tax, while phasing out the corporate income tax from large industrial concerns in exchange for their acceptance of the CAT.
That had a particular political constituency on the normally taxophobic right, as it essentially what Donald Trump’s allies in Congress look to propose for federal corporate tax reform. Edwards even might have managed to get away with more revenue out of the deal.
But, not enough revenue to replace the $800 million that the one penny in sales tax produces. Even the net fiscal benefits of “cleaning “ exemptions in the remaining sales taxes or extending existing sales taxes to services is not enough to replace the penny enacted last year. Together those plans produce just $380 million.
Edwards’ own Democratic supporters the legislature insist upon getting rid of the hated Penny, and would make their votes contingent on doing so. Republicans are fine with eliminating the $.01, but resist doing so on the backs of small businesses with a CAT.
Governor counters that he’s not doing the latter, noting that Businesses with less than $1,500,000 in taxable gross receipts are not subject to the CAT. Still, trying to produce more net revenue from corporate receipts—i.e. a Business tax increase—while keeping the corporate income structure in place (albeit by lowering the top rate of nine percent to five percent) could cost enough votes from pro-business Republicans that Edwards would not get the constitutionally mandated two-thirds majority to enact a new tax.
Generally the GOP Legislative caucus is not opposed fundamentally to a CAT, if it were to get rid of the corporate income tax as well. After all, a gross receipts tax essentially mirrors the system Texas and Ohio utilize. And if it raised a little bit more in revenue, some Republican legislators that could live with that.
Edwards’ problem is few in the GOP caucus will countenance a CAT so high as to achieve that end and get rid of the penny in state sales tax. Nor do any wish to keep the corporate income tax in place if there’s a CAT.
In other words, the GOP legislative delegation would advocate keeping the current penny in place, or else forgoing corporate tax reform, if doing both just translates into a general tax hike on all businesses. That’s the Governor’s dilemma.
By keeping the corporate income tax, and introducing the CAT, while getting rid of the penny and the corporate franchise tax, John Bel Edwards wants to split the difference with a number of legislative constituencies. That way, he thinks he will assemble a two-thirds majority in the House and Senate.
As long as the governor keeps the corporate income tax in force though, large manufacturers and chemical industrial concerns will push their allies at LABI and the GOP to block him at every turn.
Regardless, the one penny in sales tax expires at the end of 2018, and Louisiana faces a fiscal cliff. Will Democrats accept renewing that regressive tax if it means enacting a clean CAT which nets more money from business in general while eliminating the corporate income tax at the same time?
That may be a compromise the governor has to make to get the Republican majority on board. The 2017 Legislative Session starts Monday, April 10.
This article originally published in the April 3, 2017 print edition of The Louisiana Weekly newspaper.
